Sell of second home

[Keith Higgins]

We have a condo out of town that is used strictly as a second home.  We have never rented it.  We have had it for 12 1/2 years and we are considering selling it in 2022.  Are the gains from the sell taxed as regular income, or are there special considerations or tax rates for the capital gains on the sell of a second home?  Thank you for your time.        

[Anonymous_]

---

@Keith Higgins wrote:

Are the gains from the sell taxed as regular income, or are there special considerations or tax rates for the capital gains on the sell of a second home?    

---

Gains from the sale of this condo would be taxed at the long-term capital gains tax rates.

See https://www.irs.gov/taxtopics/tc409

[Mike9241]

based on having owned it for more than 1 year, the gain will be long-term capital gain.  no exclusion would be available.   the federal tax rate varies based on the amount of gain and your other income so it could be anywhere for 0% (unlikely since there is likely a substantial gain) to over 20%. then there would be state taxes.

you say it's out of town but is it out of state? if so, and the state where it's located has an income tax, you would likely need to report the gain on a non-resident return. In many states, where there is a sale by a non-resident taxes are withheld at closing. however, you still have to file that income tax return. if your state has an income tax, it too would likely tax the gain, but you would get some sort of credit for the taxes paid to the state where located.

[NCperson]

@Keith Higgins - if the property is in another state, depending on the tax laws of that state, you would need to file and pay the tax for that state. 

THEN when you fill out your home state tax return, you would get a "dollar for dollar' credit for any tax paid to the state where the property is located.  That way, you are not being taxed on the same dollar twice.

[SweetieJean]

Not all states give a "dollar for dollar" credit against taxes paid to another state, especially if the two states' tax rates are different.  For example:

Home State tax rate is 3%.

Other State tax rate is 5%.

Home State credit is only 3%, not 5%.

[Opus 17]

---

@SweetieJean wrote:

Not all states give a "dollar for dollar" credit against taxes paid to another state, especially if the two states' tax rates are different.  For example:

Home State tax rate is 3%.

Other State tax rate is 5%.

Home State credit is only 3%, not 5%.

---

If you are a resident of state A and pay tax in state B for sale of a home in state B, state A will generally allow a credit for the tax paid to B up to the amount that A would have charged on the same income.  The result is that the net state tax you pay is equal to the higher tax rate.

[Opus 17]

First, remember that your capital gains is the difference between your cost and the selling price, regardless of the amount of cash you take away (which might be reduced by a mortgage or other lien).  You can adjust the cost basis by any permanent improvements you made, and you can reduce the price by the cost of selling, such as real estate commission and some state and county fees.  The more adjustments you can prove, the lower your gain, and the lower your tax.  See IRS publication 523.

https://www.irs.gov/forms-pubs/about-publication-523

Edited to add: If you get a 1099-S, you need to report that as the selling price in Turbotax so the IRS doesn't send a letter for non-matching data.  So in the program, enter the sales price as-is and enter the selling costs as adjustments to your cost basis (rather than reducing the purchase price.)

Federal taxes have a reduced rate for long term capital gains, generally 15% or 20%, where regular income tax is charged at 22% or higher.  Most states do not have a special capital gains rate and you will pay ordinary state income tax.

As mentioned, if the home is in another state, you will need to file a non-resident return for that state where you report only in-state income from that state (the house sale).  You file a resident tax return for your home state that pays tax on all your worldwide income, including the home sale, so the home sale gets taxed in both states.  But your home state will give you a credit for the tax you paid out of state that will reduce the double taxation. 

[Keith Higgins]

Thanks for your input. This is helpful.  

[Keith Higgins]

Also, I think I'll use a tax accountant to complete out return for 2022.